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17 July, 00:51

The Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Jackson's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Jackson's cost of internal equity is:

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  1. 17 July, 01:18
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    15.23%

    Explanation:

    The computation of the cost of internal equity is shown below:

    = Bonds yield + firm's risk premium on its stock over its bonds

    = 10.28% + 4.95%

    = 15.23%

    It is a combination of the bond yield and the risk premium which is over its bond.

    We take these two items so that the cost of internal equity could be correctly computed
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